Failed offer analysis, aka how do you help seller understand the real value of their house?

Investor from Philadelphia, PA

posted over 4 years ago

This is a "help me"/ post-mortem of a offer I presented to a homeowner today.

I toured her House, and they are living there, but the house is not even rent ready. They started many projects and didn't finish. (Trims missing, flooring is mess, needs paint all arround, mismatched cabinets in the kitchen, missing gutter, etc). All surface, all the mechanicals look good.

I called her to present the offer, and I told her the house would sell for 135k-145k after rehabbed. My next line would be to explain the cost of commissions, closing costs and repairs, but she interrupted me saying she expected to sell for 135-145k "as is". She was nice, no hurt feelings.

I should have figure it out on the phone, before I even went there. I asked her how much she was willing to sell, and she preferred to talk numbers in person. On the phone she kept saying she wanted a "fair price", and my response was that it would be a fair price for both of us, but yes, I am expecting a discount because the house needs repairs.

I know homeowners are delusional sometimes, but I believe it is my job to help them understand the real value of their home.

She just now started to look into selling the house, and my letter arrived before she called the realtor. She is motivated, and has equity. I have a feeling I am letting a good deal slip thru the cracks of my inexperience...

Should I even bother keep mailing her letters? And what do your letters say for those houses the price was a completely miss?

from Orange County , California

replied over 4 years ago

@Rafael Floresta my advice is to meet her again and bring a contractor. Explain comps and the difference between turnkey and what it would take her home to become turnkey. Show comps, repairs, and closing cost. She wants to sell as is so she does not want to hastle with much or any of the work involved in selling her home. She wants top dollar she will have to take the steps necessary herself to get it. I would not waste too much time because it sounds like she is in no rush and quick cash will not be a life saver for her.

Also, advise her to consult her own contractor to see what repairs would cost for her own knowledge.

Most importantly understand there is a good chance the Realtor will take the listing at the inflated price. I myself being a Realtor, do what I can to price a home according to the market. However, if the seller will not budge I will explain what I can do at that price, and then analyze if it is worth taking the listing at the overpriced number. (we can still get many leads on a sign posted in front of a house no matter the price) I guarantee she will find a Realtor who not only will take the listing at the overpriced number but guarantee that price.

I would make the offer and also explain what she will pay in commission. (6%) So the difference in the total net. If she does not take it explain that she should give her Realtor 3-4 months to sell the home and exclude your name from the contract. Also she needs to explain that the Realtor has to sell her house at a net sale of more then what your offer will net her. This can all be included in the contract. If the Realtor is legit he will agree to the terms. You may not get anything from the extra effort, but you would have helped her, and I am sure she will refer anyone she knows that may need a quick sale.

from Torrington, Wyoming

replied over 4 years ago

This is difficult for me to reply to, because I am newborn in REI and haven't even made my first offer yet, as I am still in the 'research' phase, having started little more than a month ago, give or take.

All I can do is tell you some advice I have observed from RE forums and the one guru who actually started me down this road.

First, in your due diligence phase did you find out what her need was? Then you need to figure out how you can meet that need and help her, while helping yourself. It's called a win-win scenario in REI lingo.

I would also call her and ask her if she would like to take a few minutes to see an actual chart of estimated values and costs such as the FMV, the estimated repair costs and the way you arrived at the ARV. Also include expected closing costs and associated taxes and whatnot.

I wouldn't show her a cash flow analysis, per se, just the numbers you need to get her to understand her side of the bargain and what she is actually getting from it. If you however, are actually getting more out of it than she is, you should restructure your deal so you can still make your profit while meeting her needs also. That way, when you show her the numbers and how they help meet her needs also, she will be more favorable to your deal.

This is just a starting point, and I imagine more seasoned REI's can help you understand and structure your deal or help you understand the seller's needs better in order to get the deal done. Hope this helps! :)

Investor from Philadelphia, PA

replied over 4 years ago

@Patrick Parry I don't think she will be very keen to meet again. I can send her a letter with the details, but like you said, maybe my best bet is to move on and wait another year until the listing expire.

@William White I did try to understand her needs, and to some extend, maybe I missing a opportunity to do seller financing or some "more creative" deal here. She is in a pickle and doesnt realize. She needs the money to start her business, she wants to move to another town, 2 hours away, and she want top dollar. I wish I could do a win win here, but I can't find my way out.

from Torrington, Wyoming

replied over 4 years ago

@Rafael Floresta Then sadly it might be a deal you have to walk away from and chalk it up to a difficult seller.

But I will comfort you with some advice from a certain guru which is actually good advice; sometimes, down the road, when her situation changes or she becomes even more in a pickle, she will hopefully remember your convo with her and come around.

Sadly if she doesn't though, it will truly be her loss, not yours, IMO

Investor from Philadelphia, PA

replied over 4 years ago

@William White funny enough you said, another homeowner I scared with a "low ball offer" just called me saying I am his last resort and he needs to sell. I offered 6 months ago and have called them consistently, every month. Maybe I will see her down the line!

from Longview, Texas

replied over 4 years ago

Keep at it partner. I have been working with one landlord for just about a year now. We're close, and he wants out, but is basing his "get-out" price on his original cost basis instead of market value minus repairs minus my desired equity.

Wholesaler from Durham, North Carolina

replied over 4 years ago

It sounds like you lost her trust at some point. I don't see the point of letting a seller know your ARV. It's a lose lose situation. You're either confirming the inflated number in their head and inviting suspicion when they figure out "what you're going to make" on the deal, or you're challenging their reality and forcing them to defend their mistake. When you go to trade in a car at a dealership, they don't tell you what your car will sell for after they get it, that number has no bearing on the transaction at hand. They're offering you what your car is worth to them at that time. I once pulled out a Blue Book appraisal to show a dealer what they should be offering me... the guy told me that it's too bad KBB won't let me print out a check too. He had a point. Now I always get an offer from Carmax before walking into a car dealership with a trade. I guess what I'm trying to say is that sales isn't about convincing prospects that they should take what you're offering, it's about showing them that you have the solution to their problem and letting them make up their own mind. Why did she call you first and not a Realtor? Find out what that motivation was and address the problem/need, then offer a solution that will solve it and ask to move forward (close the sale.) Don't try to talk them into anything and for Pete's sake don't try to convince them with numbers. If your solution to their problem sounds good enough, they'll convince themselves.

Wholesaler from Durham, North Carolina

Originally posted by @Rafael Floresta :
@Luis Toledo , thank you so much. Your post is enlightening.
She contacted me first because I sent her a yellow letter.

Do you even ask the sellers how much they want out of the transaction? Or do you give a number first?

I think if you dig a little, there's a reason beyond her just getting a yellow letter from you that caused her to call an investor instead of a Realtor. Realtors are everywhere and everyone knows what they do. She decided to find out how much you would offer for her house and if you lead the conversation, but talk very little and let her fill in the dead air on the phone you'll probably find out what her motivation is. Then address that directly by offering a solution.

I'm new to real estate, but I've applied the principles of sales, marketing and negotiation in other businesses successfully (so there's my disclaimer.) Generally speaking, in any negotiation (job salary, purchase, sale, etc.) you don't want to be the first person to offer a number. I've heard many explanations for why this is a basic tenant, but here's my theory... stating a number is making a commitment to the transaction and giving up the power to decide, psychologically anyway. If I'm trying to buy your house and ask you what you want for it and you tell me a number, you're essentially saying "here's my price that I'll say yes to." If the seller gives a number, they've essentially committed to selling you their house, what's left is the price negotiation. It's like the old joke goes "Will you sleep with me for $1 million dollars?" the other person says "sure," or something like that... "How about $1?"... "Of course not, what kind of person do you think I am?"... "We've already established that you're a whore, now we're just negotiating a price..." (The joke seems to work better with lawyers...)

Once that number has been given, the other person then has the power to decide whether to accept it. If they accept it then the person who made the offer will feel obligated to complete the transaction. This persists beyond the initial negotiation. Honest people are far less likely to try and back out of a deal where they made (as opposed to accepted) the final offer. It's why I'm always willing to come down a few bucks from my price if the person asks... coming down a little almost always secures a smooth transaction because of that give and take, its the same trick as establishing obligation by offering food or drink and them accepting. Michael Quarles (in a podcast I heard) has suggested asking how much they think the house is worth and then following that up with asking how much they'd take. I think he also said that he asks at several times throughout his initial discussion how much they need.

I think buying houses for profit is a little confusing because of the terms we use. We call the person with the house "the seller", but in fact we're trying to convince them to accept our offer, not the other way around. Think of them as a customer for our service, which is "ease of transaction" that they're paying for with equity and I think you'll see that its just like any other sales process.

Agent/Investor from Murphy, Texas

replied over 4 years ago

You need to follow up with her. Send her the name of your contractor, give her the name of the realtor you have a relationship with in the neighborhood. Giving work to your contractor or a listing referral helps all parties involved. Show her you are there to help her even if that means you won't get to buy her home, be that with a great realtor or someone to do the repairs. Once she gets independent confirmation of what you told her regarding price and condition of her home she may come back with a more reasonable price.

Investor from Philadelphia, PA

replied over 4 years ago

@Luis Toledo I did let her throw a number. It was way too high. It is hard to come back when the starting number is way off. The funny thing was, her first number was 165k, and after she told me I gave a 30 seconds pause, looked to the floor, which I had planned to do beforehand, no matter the price. She then went on a ramble and cut down to 145k. 145k is the top of the ARV.

I will let some time go by and let her survey the market and learn more about the prices.

Investor from Philadelphia, PA

replied over 4 years ago

@Todd Plambeck thanks for the suggestions. I did tell her I am available for whatever she wants, told her that if she wants to use my contractor, I would gladly introduce them. I even told her if she wanted to run the rehab herself, I would show her what I would do. This is my farm area, and if I am not getting a deal, at least I would benefit of have some more good comps around.

That said, I highly doubt she will. She is expecting her husband that lives 2 hours away (the reason she wants to move to another town) to slave himself into these projects.

I will keep touching base every month, and slowly I will either piss her off, or keep a counter on her head of how things are not getting done.

Wholesaler from Durham, North Carolina

replied over 4 years ago

Originally posted by @Rafael Floresta :
@Luis Toledo I did let her throw a number. It was way too high. It is hard to come back when the starting number is way off. The funny thing was, her first number was 165k, and after she told me I gave a 30 seconds pause, looked to the floor, which I had planned to do beforehand, no matter the price. She then went on a ramble and cut down to 145k. 145k is the top of the ARV.
I will let some time go by and let her survey the market and learn more about the prices.

I agree, it sounds like she might not be ready to sell yet. Did you ask about a timeframe as to when she needs to sell and why? If she doesn't have that motivation, you might have a while to wait. Definitely follow up though, time and circumstance and all that...

Flipper/Rehabber from Decatur Atlanta, GA

replied over 4 years ago

do you have any comps for the area? Keep trying! I've only done a couple of flips but my most profitable was one I bought for a crotchity neighbor who I keep talking to until we met at a fair price. Most sellers may see a home sale nearby but not realize that home has granit and hardwoddsbut they haven't updated in 20 years. You must be real delicate when discussing these items with them so you don't offend, just inform

Real Estate Investor from Whittier, California

replied over 4 years ago

Briefly explain that a broker will take the overpriced listing and try to convince her to take less as time goes on. The agent will hope that she will get desperate and take a lower price. Tell her to ask the agent to put you as her potential buyer. She can sell to you at any time and cancel her listing agreement. Tell your seller when the listing agent starts bringing you the lowball offers to call you and you will buy it.

You probably have a 50/50 shot that she will call you later. At least she will know you are knowledgeable. Even if she doesn't sell to you (she might be embarrassed to call you) she might refer someone to you in the future.

To sell through an agent she will have to either put money in the property, or sell to an investor who will only pay wholesale prices. Eventually she will see you were right.

Property Manager from Livonia, MI

replied over 4 years ago

i didn't read all the responses, but here's my thoughts..

why did you talk to her about ARV? what does she care about what the house costs? it's just an avenue for more discussions (no, you can get more than this, you are being too greedy, what's your spread, etc, etc).

this is what i did on the last one - looked at the house, pointed out things that needed to be done, then gave them a number. they asked why so low, i told them that i had over 30k worth of repairs (MAJOR) that needed to be done.

so, bottom line - dont talk to much about the final result. tell them the obvious, tell them how much they will SAVE by not going with a realtor, the fact that they dont even have to paint, add trim, etc. tell them things that will BENEFIT THEM, not you. put yourself in their shoes (role play at home with a family member). what do YOU want to hear if you were a homeowner and someone came to your house?

Investor from Philadelphia, PA

replied over 4 years ago

I called her today and told her how great rental her house would be. I told her that if she wanted to do a partnership, we could work something out (Sub to). She was interested, and she said she talked to a realtor and will first try to put it on the market with a short term listing. I guess time will tell. I have never done a sub 2, but I'm sure I can figure it out if she contact me again.

Investor from Philadelphia, PA

replied over 4 years ago

@george, we were talking about ARV because that is how she was approaching the transaction from the start. I am sure if I had told her my offer, she would have been more offended and maybe not even answered my phone. I am not very experienced so I'm willing to spend a but more time than most, but it looks like a time waster.

from Longview, Texas

replied over 4 years ago

@Rafael Floresta I'm new too, and have invested way too much time on a "fair offer" when the sellers had no intention of selling the house at anything reasonable. Now I try to fish the waters ahead of time. As a buy and hold guy I use a rent number to back into a price range but always qualify my offers by saying I need to see the house. Sometimes you can weed out the unmotivated ones when the numbers are way too different.

Investor from Philadelphia, PA

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